We used to have fun commenting about the bond market, including Treasuries, Mortgages, Municipals, and Corporates. But that was before the dark times. Before deleveraging.
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Monday, August 29, 2011

The markets took a beating recently when a deal to raise the debt ceiling was finally reached. The bipartisan compromise came down to the zero hour as government officials argued up to the last minute on how to effectively map out a repayment strategy. When the deal was finally reached, America's triple A credit rating was downgraded, for the first time in history, to a double A status. This has many concerned about American's economic viability, especially China. It's for these reasons that Vice President Biden traveled to China to placate fears that America could default on it's debt.

The American economy isn't new to economic troubles, but everything hit the fan when news of Standard and Poor's downgrade of the US Sovereign Credit Rating was released. The S&P 500 has long held the economic standard and credit rating for the world market, and issued a warning, not to the private sector, but to political officials.

A warning was issued to the U.S. Government that if America couldn't find an effective strategy at paying down its debt, there could be consequences. Standard & Poor has been worried about America's borrowing practices for some time now and after a contentions debate in Washington over a deal, the market has lost faith in the country’s ability to make effective and sound economic policies. After the announcement, the entire market went into a state of flux and China, the largest holder of American debt, is voicing serious concern over the way we're doing business.

The past two weeks have shown incredible volatility in the market as, after debt deal was reached, the Dow lost more than 200 points before recovering ground later on in the trading day. Ever since then, three digit swings in the market have become a daily occurrences, and almost expected. This, however, isn't as much of a concern for investors, like China. The biggest issue that's concerning the world market is the state of U.S. Bonds, long considered one of the safest investments in the world. Bonds and treasuries haven't been hit yet but, if this were to happen, the entire market could head towards something worse than any of us could imagine. This is why VP Biden is making the rounds and trying to reassure China over the viability of the American market system.

Chinese officials, who have long been surprisingly silent as the American economy has slumped ever further into recession, are now speaking up. They're now openly criticizing the political players in the government. You could consider China much like a shareholder in America as it holds over 1 trillion dollars of America's debt. This makes them the largest shareholder in the game and they've become increasingly concerned, like everyone else, about American's poor borrowing decision and partisan squabbling. It was Biden's aim to ease these tension with his most recent five day visit what some are calling America's “ Charm Offensive.”

Vice President Biden struck a much different tone on his most recent visit to the world's fastest growing economy. America, a long-time advocate of political rights and change in the region, was far more subtle than in the past. VP Biden tried to underscore the important ties that the two world powers have in shaping the future of our planet. It was a PR campaign to try and ease tensions and soften China's increasingly negative opinion of the American system.

It's not clear yet whether or not Vice President Biden's visit will prove positive, but it's not just China that the country has to worry about. There is serious and legitimate doubt regarding whether or not the country can make sound and effective decisions for the greater good of the entire country, and world for that matter. Americans, as well as the world, will be looking very closely at the country during the election coming in 2012. It's hoped that a new tone can be set, one of compromise and intelligence.

About Me

I oversee taxable bond trading for a small investment management firm. Opinions expressed on this website may not reflect the opinions of my employers. Strategies described here should not be taken as advice, and may not be the strategies being used for my clients. Take this website as the egotistical ramblings of a bond geek and nothing more. E-mail is accruedint *at* gmail.com or find on Facebook.